Agricultural Policy

Who will pay the price?

Print edition : October 23, 2020

Farmers from various farmers’ associations stage a protest rally in Bengaluru against the farm Acts on September 21. Photo: Somashekar G.R.N.

At a protest against the farm Acts in Bengaluru on September 28. Photo: Aijaz Rahi/AP

The three newly enacted pieces of farm legislation threaten to annul a key provision of agricultural price policy in India, the minimum support price. They reflect the government’s lack of empathy for small and marginal farmers, who are among the most economically vulnerable sections of rural India.

A large number of farmers are protesting against three agricultural market reform Bills passed by Parliament recently. The nation-wide protest called by several farmers’ organisations on September 25 saw large participation of farmers in States such as Punjab, Haryana, Rajasthan, Uttar Pradesh, Maharashtra, Tamil Nadu, Telangana, Karnataka, Kerala, Odisha, and West Bengal. Trade unions, opposition parties, including some allies of the National Democratic Alliance (NDA), have lent their support to the protesting farmers. The widespread protests have brought long-standing issues in agricultural marketing to the fore.

The Essential Commodities (Amendment) Act takes away the system regulating supply and stocks of agricultural products, thus legalising private firms’ storage of large stocks of essential food items. The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act ensures the entry of contract farming and The Farmers’ Produce Trade and Commerce Act allows private firms to purchase directly from farmers outside the government-regulated markets.

Small and marginal farmers’ concerns

The Union government has tried to convince farmers that these legislative changes will increase competitiveness in agricultural marketing, and thus increase the incomes of farmers. However, farmers’ are concerned that the new pieces of legislation will result in the further deterioration of their economic conditions. These fears stem from the reality that rural livelihood issues in India, particularly in farming, are synonymous with the preponderance of small and marginal farmers (operating less than 1 hectare, or 2.47 acres). The latest agriculture census of 2015-16 reveals that 86 per cent of the total operational holdings are by small and marginal farmers. This lower rung of peasantry, with abysmally small holdings of agricultural land, already suffers from the burden of debt, low farm produce prices, poor irrigation facilities, increased cost of cultivation and recurring crop failures.

This, then, is the background against which farmers’ resistance to these Acts ought to be viewed. It appears obvious to this overwhelming section of the peasantry that the new legislation does not address their fundamental concerns in any meaningful way. Indeed, there is a fear that it may well result in these long-standing issues taking a turn for the worse. Although the Narendra Modi government has claimed that these Acts are a “second freedom” for small and marginal farmers in India, the concerns raised in the on-going farmers’ movements raise serious doubts about such a claim.

The major demand raised by the farmers is to take back the the three Acts and introduce a Bill that ensures an implementation of statutory minimum support price (MSP) with procurement promises. Even though Prime Minister Narendra Modi said that the MSP will continue, farmers appear to have lost their trust in the Prime Minister. This is not difficult to understand. After all, promises made before the 2019 general election remain largely unfulfilled. Even before these Bills came along, farmers’ organisations were demanding that the MSP be made statutory along with active state-led procurement. One of the foremost demands of farmers is implementation of the M.S. Swaminathan Commission’s recommendation that the MSP ought to be one-and-a-half times the cost of cultivation.

It is striking that none of the three legislations mention MSP and procurement. However, they formally open up the market for private players while claiming that they are aimed at ensuring better income realisation for farmers. The farmers’ fear that the government, by removing all regulations on private trading of agricultural produce, is opening up contract farming to provide an entry to private corporate entities. The fear that this will lead to the dismantling of the system of public procurement is not unfounded.

Those who favour the new laws assert that they will result in competition among traders, which would only be beneficial to farmers because of the resulting higher prices. There is an inherent flaw in the logic behind this rosy picture. The assumption that private traders are currently absent in the business of trading in agricultural produce is laughable. In 2019, 95 per cent of the sales of agricultural commodities in India was handled by private trade; only 5 per cent of the all agricultural produce was procured by the government through its arms. Behind the apparently logical argument that free trade and free markets are necessarily more efficient lies an ideological bias in favour of deregulation. If private trade, which already has a 95 per cent market share, has not ensured better realisation of prices for farmers, how does a mere 5 per cent increase ensure that?

State of MSP and Procurement

The officially declared objective of the price policy concerning agricultural produce is to ensure remunerative prices to growers. This has often been seen as motivating farmers to make more investments in agricultural production. At the other end of such a policy regime is the officially stated intention to safeguard the interests of consumers by making cereal supplies available to them at reasonable prices, primarily through the public distribution system (PDS). Before the commencement of each sowing season, the government announces MSPs for a range of agricultural commodities. Moreover, the government is supposed to organise purchases at the MSP through government agencies, cooperatives, and other designated agencies so that prices do not fall below the MSP for these specified commodities.

The MSP itself is based on the recommendations of the Commission for Agricultural Costs and Prices (CACP), which is supposed to work out the normative costs of production for each of these crops. In reality, although the MSP has remained a notional price with no legally binding commitment by the state, it at least acts as an indicative floor price. However, in the real world, what farmers actually realise in terms of prices is crucially dependent on what share of the crop in a State is actually procured at the MSP that has been officially set. Thus, States with higher procurement shares, at least for wheat and paddy, reflect a higher share of farmers realising at least the MSP. Although the new policy regime does not officially state that MSPs will become dysfunctional, there is widespread fear that this is exactly what would happen after the dismantling of the Agricultural Produce Market Committee (APMC) channel of procurement.

In fact, the policy of public procurement has remained almost ineffective, barring the cases of paddy and wheat. Procurement for paddy and wheat averages about 40 percent of the marketed surplus while the procurement for coarse cereals is below 5 percent. Obviously, the low procurement levels in the case of most crops result in low price realisation for farmers. Shockingly, according to AGMARKNET data, on no day during the entire 2018-19 kharif season did farmers sell pulses at the MSP that was set. Without an effective procurement policy, the mere announcement of MSP does not necessarily improve the prices for all the crops.

Prior to these Acts, the Shanta Kumar Committee recommendations (2015) proposed deregulation of APMC and thereby curtailment of the government’s responsibilities in procurement. The lack of investment in the APMC infrastructure and the lackadaisical attitude to public procurement have already robbed the MSP of its teeth. The next step was to use the failure of state procurement to create a vacuum which private players could fill. Of course, there is no point in denying that farmers have problems in accessing APMCs or that “middle-men” there have acquired greater clout in recent years. But to “reform” the APMC is one thing but to demolish is quite another. Further deregulation would take away the minuscule security that farmers had in terms of realising better prices. Meanwhile, trading permits outside the APMC mandis do not necessarily guarantee better prices for farmers.

Why are farmers demanding MSP and procurement?

The reality is that agricultural products are sold at prices lower than their MSP. Farmers often sell their crops at prices lower than their cost of cultivation, incurring losses from cultivation. This primarily happens because of the fluctuation of prices in the open market. The demand of the farmers is that the government should fix the floor price before sowing and if the floor price is lower than the price at the time of harvesting the government ought to procure their produce at the MSP. Unlike most farmers, the government has the wherewithal to store produce. On the other hand, farmers who are mostly debt-ridden need money immediately after the harvest to repay their loans and invest in the next crop.

However, the legislative changes are premised on the logic that the poor state of government finances does not allow it the luxury of undertaking procurement at MSP-defined prices. This problem arises because the government purchases crops from farmers at the MSP fixed by it and then distributes them at lower rates through the PDS. Thus, the government incurs costs associated with storage and distribution of food grains, which is reflected in the food subsidy bill of the government. Now the question is this: should the government ensure food security of its citizens through a well-functioning PDS? Not surprisingly, the negative response to this question is often clothed in the garb of “efficiency” and “fiscal prudence”. Others with a greater welfare orientation argue that governments’ primary responsibility lies in securing access to food, shelter, and other necessary services for all their citizens. The slant of these legal changes is thus decidedly ideological.

A solution for the government is that it can purchase the required food grains from private traders directly as and when they are required for public distribution systems. In that case, the government need not store the food grains to ensure the food security of the country. The Essential Commodities (Amendment) Act allows traders to store an unlimited quantity of agricultural products. The government will directly buy from private firms and distribute it through ration shops. This way, the government can wash its hands of storage and maintenance of food grains for the sake of national food security.

Risks of contract farming

The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Act opens up the doors for private firms in contract farming. Private players will thus have a contract with farmers for a particular crop before the sowing of the crops at a certain fixed price. At the end of the harvesting, farmers have to sell that product to the company with whom he/she had contracts at the fixed price. However, farmers will not be able to sell the crop to someone else if the market price is higher than the contract price. This is in sharp contrast to the MSP regime which allows farmers to sell elsewhere (to private trade) if they offer prices that are better than the MSP.

If the government agrees to the farmers’ demand, it ought to be responsible for procuring the produce if the market prices fall below the floor price; but farmers would be free to sell in the open markets if prices are higher there. These choices effectively brings out the inherent risks associated with the choices of markets as well. The farmer, when selling to private traders, may have a chance of realising prices which are higher than the MSP, but the risks associated with this may also be quite high. There may be multiple reasons why, even after having the contract with the farmers, the company may fail to execute the contract to purchase a commodity from the farmer. It may be because of issues of quality of the product, or sudden closure of the company, and so on.

On the other hand, procurement can be seen as an insurance. In a highly volatile market, realising MSP through procurement provides a certain assurance to farmers to maintain at least a certain level of income. The second arrangement therefore seems to be more beneficial for farmers when compared to contract farming. Farmers have very little staying power to fight any legal disputes with big business . That is why farmers keep insisting on the continuation of the MSP system and better implementation of procurement policies.

These new Acts break the structure of government-regulated markets and allow private firms to encourage middlemen to purchase agricultural products outside the regulated market. This will reduce the States’ revenue earnings from the regulated markets.

Although the MSP regime may not end immediately, in the absence of a procurement system, the announcement of the MSP will become even more of a formality. So far, the MSP and regulated market price have been working as a price signal for trading outside the regulated market. This price signal will get affected. In addition to that, in the absence of recording of prices outside the regulated market transaction, the agricultural product market price information will get thinner.

Usually, small and marginal farmers sell their crops to village traders and big farmers residing within the village who offer prices that are comparable to the prices prevailing in the regulated markets. In the absence of any such price signals, the chances of distress selling at lowered prices will be high for small and marginal farmers. An example can be cited from the Situation Assessment Survey of the National Sample Survey Office (NSSO) conducted during 2012-13. During kharif 2012, at the all-India level, more than 50 per cent of the paddy produced by small and marginal farmers was sold to local traders. The average price realised by marginal farmers selling to these local private traders was about Rs.1,150 per quintal. Relatively larger farmers (operating more than 2 hectares) had realised Rs 1,300 per quintal. During the agricultural year 2012-13, the MSP for paddy was set at Rs. 1,250 per quintal. On average, a marginal farmer thus realised a far lower price for paddy from the local trader than the officially declared MSP. However, the situation for marginal farmers growing paddy in 2012 in Punjab and Haryana was strikingly different, mainly because of public procurement. Marginal farmers in Punjab sold almost half their total paddy harvest at mandis in kharif 2012, and 33 per cent of their produce was sold to the local private traders. On average, the marginal farmer in Punjab realised Rs.1,500 per quintal, 20 per cent higher than the MSP set by the State government for that year’s crop.

Without price “signals” from APMC mandis, small and marginal farmers would not have any bargaining strength to realise at least this price. In contrast to the marginal farmer in Punjab, only 16 per cent of total paddy produced by such farmers in Uttar Pradesh was sold at mandis during the same year. About 70 per cent of the total produced were sold to the local private traders, where marginal farmers on average realised only Rs.1,010 per quintal, which is far lower than the MSP. In effect, the low levels of procurement in Uttar Pradesh failed to provide the peasant with a degree of price security, something that was enjoyed by her counterpart in Punjab.

Advocates of deregulation repeatedly claim that their motivation arises from their desire to curtail the influence of middlemen, which would result in lower prices for consumers. But the Bills, by removing stocking limits of grains, pulses, oilseeds, and other food products for private firms, will facilitate exactly the opposite. While producers will be affected by low prices, consumers will face rising prices. In the absence of a functioning procurement and public distribution systems working in unison, this prospect of rising prices might well be the most worrisome aspect of the Bills for the average Indian.

How to ensure remunerative prices?

The Modi regime has demonstrated its readiness to disinvest public resources and be a zealous ally of big business. These new legislation, when seen in that context, are not a surprise. The pandemic has provided an “opportunity” to the government to undemocratically implement such legislation. Even though agriculture is a State subject, the Centre has bypassed all such channels fearing a probable resistance. While farmers have justifiably taken the resistance to the streets, there remains an important question: will merely revoking the legislative changes protect farmers’ interests?

Procurement, even if it is 40 per cent of the total marketed surplus for crops such as wheat and paddy, assures better price realisation for all classes of farmers. Therefore, to ensure remunerative prices through MSP, a better implementation of procurement itself should be promoted. Dismantling the APMC system and providing spaces to private players will only increase the risk of income loss for a majority of farmers. The price volatility, which is often a result of a lack of systematic crop planning in India, cannot be simply tackled through permitting a sale of crop outside the mandi.

The legislative changes reflect a lack of empathy towards the highly economically vulnerable sections of the farmers. Every rhetorical flourish associated with these, claiming them to be farmer friendly ought to be called out for what they are, blatant lies sold to millions of desperately poor farmers.

Biplab Sarkar is an economist based in Bengaluru. Soham Bhattacharya is a PhD Scholar at the Indian Statistical Institute, Bengaluru.

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